But with feverish activity and high valuations comes the danger of a bubble, said veteran investor Anne DeGheest, who was an investor and entrepreneur through the tech boom of the 1990s, and who founded Sand Hill Road firm HealthTech Capital several years ago.

Ms. DeGheest has invested extensively in medical devices and in health-related information technology, and she said she learned in the ‘90s to read the signs of an economic bubble. She sees some of those signs today, telling Venture Capital Dispatch of a potential “Series B crunch” as a number of health entrepreneurs without solid business plans try to raise money from investors.

Q: What is the ‘Series B crunch?’

A: Right now, there is a bubble forming. The country is re-shaping its largest industry, and it’s the biggest experiment we’ve ever done with the American economy. It’s opened the floodgates, and there is a sort of Gold Rush because there is massive opportunity. So much of the money is going into companies at the seed or Series A level, and it’s coming from angels and unsophisticated investors. When it comes time for these companies to raise a larger, Series B round, they are going to have to answer a lot of tough questions about their business plans. Many will not have answers to those questions, and some of these companies are going to fail.

Q: What are the types of questions investors will ask at the Series B level?

A: We’re going to ask, ‘What is your value proposition, and how will you prove it? What pain points are you trying to solve in the market? What’s the cost of customer acquisition in your business?’ A lot of these companies say they are going to pull data from a variety of sources, run algorithms on the data, and then present the data to the customer. At the Series B level, we would ask, ‘Why is this data actionable? Who is meant to take action on the data? How do you measure the impact of this data?’

Q: Why do you think the company founders will not have those answers?

A: This is what I have been seeing. There’s a tidal wave of startups like we’ve never seen before. It’s kind of like the dot-com boom, there is this rush to build a product that you can demo. Thirty-five companies presented [at a health I.T. conference affiliated with the JP Morgan Healthcare Conference]. And at CES, I lost count. The effort is all going into making a product that can be shown, but not into building a business. I don’t see enough actual business plans.

Q: What other signs do you see that there is a bubble forming around health IT?

A: I see a lot of things that remind me of the ‘90s. Just like then, unsophisticated investors and angels are providing a lot of bridge loans. Without a good business plan, though, a bridge loan is a pier to nowhere. Also, there’s a shortage now of good engineers. There are also many, many copycat companies in health IT. They have no actual intellectual property, they just say they are going to take information and deliver it more efficiently. Some of these companies will not put a cap on their valuations. They seem to think there is no actual limit to their value.

Q: What is your prognosis for the whole health IT sector?

A: It’s very strong, because there are massive forces changing the existing players in the health-care system. There is tremendous opportunity. But there is too much activity at the seed and Series A level, and too much a rush to build a product. To raise a Series B, these companies are going to need metrics. Without that, a significant number could fail. I’m hoping to see more emphasis on building solid businesses.

Comments (5 of 6)

Isn't that the nature of a new arena, where new technology is demanded? It grows fast and then the best of the best remain??! This seems to be the cycle in any new technology regardless of arena,

12:59 am February 11, 2014

Matthew Holt wrote:

Hang on, Isn't this rush from unsophisticated angel investors mostly your fault. Ms DeGheest?? And BTW this isn't a bubble--check out that Karl Marx guy, he explained it well (even if he doesn't get enough credit on the pages of the WSJ)

Bubbles around new technology are part of capitalism--any modest checking of the historical record proves this and b) compared to the last bubble (1999-2001) what we have going on here in health technology is actually on very firm footing. WebMD's market cap alone in 2000 exceeded all VC investments in health tech in the last 3 years!

3:13 pm February 10, 2014

Stentor wrote:

Healthcare IT is about fitness monitoring of the "worried well" "wellness" data mining and diagnosis (at best). Bloodless number-shoveling. The hard stuff, the blood and guts activity of actually providing therapies to real flesh and blood patients by actual human providers that require extensive training and built by companies that require highly specialized and expensive expertise and regulatory compliance remains the same, and that part of the equation is being squeezed by a glacial FDA, the medical device tax, and collapsing reimbursements for innovative therapies.

12:15 pm February 10, 2014

Gregg Masters wrote:

Agree to the bubble sentient or at least the indicia of what may signal such a forward capital drought.

For me the underlying mythology (kool-aide) that goes to the pain and value proposition thresholds is the flawed assumption that tech enabled platforms, apps and uber-aggregators can morph data into actionable information biz models that tame the rapacious appetite of our healthcare borg via an emperor has not clothes 'cost shifting' paradigm. The cost shifting charade opportunistically rebranded as 'consumer directed' health plans assumes an empowered, informed or otherwise health literate consumer with 'skin in the game' can drive accountability, transparency and thus the fair value of inflated hospital and tertiary physician services where wholesale purchasers (health plans, employers, Government) could not.

I have some swamp land in Florida for sale, any takers?

Gregg Masters
@2healthguru
ACOwatch.com

11:12 am February 10, 2014

Robert Capelli wrote:

I believe that these "ideas" of startups are opening up a lot of holes in the systems.

Will all those holes be filled by great companies, no, but what is happening, is that these companies are starting to roll up into smarter solutions, with real value.

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